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Schools Brace for Debt Shock

Next year, Laguna Beach’s public schools will be req­­­­­­­­­­­­uired to carry a $68.7 million debt from the state’s teacher-pension fund, an amount that has the potential to overwhelm the district’s $46 million budget and one school officials say they have no clue how to repay.

The debt represents Laguna Beach’s share of the currently estimated $71-billion unfunded liability in the California State Teachers’ Retirement System, known as CalSTRS, which pension officials are now divvying up among school districts statewide. The projected amount is expected to double to $167 billion as the state lowers its anticipated investment return to reflect current market conditions.

Pension projections were based on a 7.5 percent annual investment return, but new guidelines based on more recent market history lower the rate of return to a more realistic 4 percent. State officials expect school districts to ante up the difference, explained Dean West, the district’s assistant superintendent in charge of business services.

And district officials expect a similar new debt added to their books for classified employees from the state CalPERS pension program as well.

Laguna Beach school board member Theresa O’Hare says no one yet knows the full ramifications of absorbing both debts. “We’re in great financial shape,” she said, “but the other districts that actually borrow money and are living on the edge, which are so many of them, you put that on your liability column and that precludes you from doing anything.  It’s a tremendous problem.”

Laguna Beach’s school district budget includes two reserve accounts totaling $28 million, designated for a safety net should property tax-based funding be eliminated and for repairing and replacing school facilities, neither of which can be tapped to pay pension debt, O’Hare said.

In its first notice to public school districts, the state legislature offered 10 options to get the plan fully funded by tapping the school districts and requiring higher contributions over time. The options offer two different percentage rates over increments of 20 to 60 years, and are listed, West said, in a descending order starting with more pain, more gain.

“The quicker they fully fund the pension, the less it will cost in the long run,” he explained.  “Unfortunately, the state is looking for the school districts to take a significant portion of the responsibility,” said West, explaining that the government accounting standards board wants to change its accounting methods for all government agencies so that more of the burden to pay pensions falls on the employer.

In the meantime, state Senator Mimi Walters last week introduced legislation that could appropriate up to $2 billion in emergency funding over the next two years to CalSTRS and establishes a working group to look at long-term solutions.

The state created the CalSTRS pension program in 1913 and had only two contributors, a $12-a-year contribution from members and a state contribution equal to 5 percent of the revenue generated by the state’s inheritance tax. In 1935, the employer started contributing $12 a year per member and members  $24 a year.

In 1998, the program was fully funded by high investment returns and educators were given additional benefits to encourage them to work longer rather than retire, according to a report released this month from the state legislature. Then the economic tide turned while benefits were still running full throttle.

“The state will say the employee benefited with higher benefits while the employer wasn’t required to contribute more,” said West.  “If you increase benefits and you have investment shortfalls from a bad market and you don’t require any greater contribution, that results in an unfunded status.

“Recent returns haven’t been so good.”

Dean conceded that the plan may seem fair, since the district is the employer, but the state holds the purse strings. “The state has complete control of the pension fund and allowing it to get out of control is the state’s responsibility,” he said.

State officials intend to make a dent in the unfunded liability by increasing the state’s contribution to the CalSTRS pension plan by 31 percent and the school district’s by a maximum of 278 percent when the plan goes into effect, West said.

Teachers now pay 8 percent of their salary into their pension fund, the district contributes another 8.25 percent and the state pays in a little more than 4 percent on every salary dollar. “But that’s not enough,” said West, “because the funding gap for current pensions is too large.  The end result is that we have to put aside more money to pay for the current pensions. And that will have to happen over time.”

Including the liability in the district’s budget is a done deal, said West.  Districts, he said, are required to comply because it’s a national issue affecting all government agencies. The liability will show up in the deficit column in the district’s 2014-15 audit report that will be issued before December 15, 2015.

 

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